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Abstract
This article examines livelihood diversification strategies of rural households using
survey data from the Himalayas. We present and explore an analytical framework that
yields different activity choices as optimal solutions to a simple utility maximization
problem. By classifying the range of activities of rural households into a few distinct
categories based on their profitability and by considering portfolios of farm and nonfarm
activities, we provide novel insights into diversification behaviour of rural households.
The evidence shows that while the poor are mainly agricultural labourers and
work in the low-return non-farm sector, the better-off diversify in high-return nonfarm
activities. As expected, we find strong evidence that education plays a major role
in accessing more remunerative non-farm employment. A somewhat less intuitive finding
is that larger household size is associated with higher probability of diversification
into the high-return non-farm sector. The finding that the farm size is not a constraint
to diversification in lucrative non-farm employment is also surprising. Geographical
location plays a role in diversification behaviour of rural households indicating the
importance of local context.